President Bush will announce the White House’s plan for the automakers at 9 a.m. EST.
The White House indicated Thursday that it could require a major restructuring by Detroit automakers in exchange for government loans, such as a merger or an assisted bankruptcy, where the government guarantees financing as the companies reorganize and shed excess costs.
Deep production cuts announced by automakers this week were aimed in part at showing the White House that they mean business about bringing costs in line with revenues.
President Bush said he is trying to strike a balance, keeping in mind the need for an industry downsizing while protecting taxpayers and the economy against the chaos that would be unleashed if either Chrysler or General Motors went bankrupt before the end of the year. A decision could be announced as soon as Friday.
“I am worried about a disorderly bankruptcy and what it would do to the psychology and the markets,” he told the American Enterprise Institute.
But he later told C-SPAN the administration should not give the companies loans without getting a plan showing substantial concessions from management, labor and dealers that will ensure they become solvent again. “I’m also worried about, you know, putting good money after bad,” Mr. Bush said.
“I think under normal circumstances, no question, a bankruptcy court is the best way to sort through credit and debt and restructuring. No question. These aren’t normal circumstances. That’s the problem.”
Mr. Bush added that he feels “an obligation” to his successor, President-elect Barack Obama, to resolve the matter and “not to dump him a major catastrophe in his first day of office.”
Many analysts say that simply giving the automakers loans without securing substantial concessions will only postpone their financial crisis for a few months until Mr. Obama takes office.
In light of the trade-offs, White House press secretary Dana Perino said a bankruptcy that would be pre-arranged or assisted by the government was a possibility.
“There’s an orderly way to do bankruptcy that provides more of a soft landing,” she said, describing that as one of a “spectrum of options.”
The possibility that the White House might force the auto companies into bankruptcy prompted a 16 percent drop in GM’s stock and a 10 percent drop in Ford’s stock Thursday.
Under one scenario, the Treasury Department could persuade a major bank to sponsor GM or Chrysler in bankruptcy, with the Treasury providing a guarantee on the post-bankruptcy financing. That would ensure that the reorganization of automakers doesn’t turn into a forced liquidation, which could cause millions of layoffs and a violent unraveling of their chain of suppliers and dealers.
That option could cost the Treasury as little as $5 billion, limiting the drain on Treasury’s dwindling financial bailout fund, which has only $15 billion left uncommitted.
Another possibility — a reopening of merger talks between GM and Chrysler that were abandoned last month — appeared less likely Thursday as GM vehemently denied that talks had been restarted. Published reports said Chrysler’s owner, Cerberus Capital, was interested.
Ms. Perino said the negotiations between the administration and automakers include all affected parties, including unions and debtholders, who would face steep cuts in a bankruptcy. Galvanizing support behind a potentially complex and far-reaching restructuring from all the parties is one reason for the delay in announcing a deal, she said.
“In any scenario that comes forward after this decision-making process, all those stakeholders are going to have to make tough decisions,” she said.
Many financial experts argue that the automakers should file for Chapter 11 bankruptcy with government funding and pre-arranged deals from major creditors, rather than attempt to reform their labor contracts and debt outside of court under the supervision of a government “car czar,” as envisioned in legislation passed by the House.
Vice President Dick Cheney told The Washington Times on Wednesday that he also is leery of having government bureaucrats make decisions that should be reached by the car companies.
GM and Chrysler executives, along with the Detroit auto industry, have argued that any form of bankruptcy could lead to a devastating chain of failures among suppliers and dealers, while consumers would shy away from purchasing vehicles from a bankrupt automaker.
Chrysler told Congress that should it be forced to file for bankruptcy, it would need up to $20 billion in loans to get through one year of court supervision. Without such funding, known as debtor-in-possession financing, the company would be forced to liquidate.
GM and Chrysler have said they need at least $8 billion by the end of the month to avoid bankruptcy and at least $14 billion to get through the first quarter.
Chrysler on Wednesday took what could be the first step toward a total shutdown by announcing it would shutter all 30 of its factories and idle 46,000 workers for at least a month.
With the clock ticking on Chrysler and GM, Moody’s senior vice president Bruce Clark said a pre-arranged bankruptcy is the best and most likely option, but the government may have to provide stop-gap financing for a few weeks to buy time to negotiate deals with the automakers.
“A prepackaged bankruptcy might be the best approach to current problems, but achieving timely agreement from a broad range of creditors would be highly difficult, especially given the critical funding status of GM and Chrysler,” he said.
Dwight Cass, analyst at Breakingviews.com, said it is “worth the headache” for Treasury Secretary Henry M. Paulson Jr. to negotiate stiff terms on loans to Detroit because the carmakers and labor unions would like to postpone the inevitable and negotiate a more favorable deal with the incoming Democratic administration and Congress.
“Paulson can regain some of his free-market bone fides if he requires strict terms,” he said. “If he sets tough conditions now, it increases the chances that the next Congress will follow suit.”
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